[GRAPHIC] HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER
- -------------------------------------------------------------------------------
During the first half of 1997 REITs and other real estate
operating companies delivered returns that were in line with
expectations but fell far short of the broader market. The S&P
500 Index1 delivered a 20.6% return for the first half, followed
closely by the Dow Jones Industrial Average return of 20.1%, and
yet the Wilshire Real Estate Securities Index (WRESI)2 delivered
a relatively modest return of 6.5%. Interestingly, for the 12
months ending June 30, 1997, the WRESI and the S&P 500 Index have
virtually identical returns of 33.53% and 33.63%. When people
ask how REITs have performed relative to the market, the answer
is that REITs have been competitive. In fact, for the five years
ending June 30, 1997, the S&P 500 Index has delivered a 19.7% vs.
16.3% for the WRESI. The performance of the Heitman Real Estate
Fund for the first six months of 1997 was 6.42% for the
Heitman/PRA Institutional Class and 6.07% at net asset value and
1.03% at public offering price3 for the Advisor Class.
One observation that should be noted when discussing REITs is
that they are still in their infancy and therefore are continuing
to raise a substantial amount of equity relative to their
existing base. Over 10% of the market capitalization of the
WRESI at 6/30/97 was the result of secondary and initial public
offerings during the first half of 1997. Needless to say,
scarcity did not play a role in the positive returns of REITs
thus far this year.
We continue to focus on selecting securities which are under
valued given their prospects for growth. This approach, commonly
referred to as growth at a reasonable price (GARP) is
particularly appropriate given the robust recovery in the real
estate markets.
REAL ESTATE MARKET
The real estate cycle continues to mature. Supply and demand
in many markets and property sectors are approaching equilibrium
as new supply is generally meeting demand. As long as the
economy remains healthy and equilibrium conditions exist, rents
and operating margins will continue to improve and real estate
will provide attractive returns.
External growth via acquisition and development, remains an
important driver of investment returns. This external growth is
consistent with the trend of securitization of real estate.
- ---------------------------
1The S&P 500 is an unmanaged index of common stock which cannot
be directly invested in.
2The Wilshire Real Estate Index is an unmanaged index of real
estate securities.
3Reflects the deduction of the maximum 4.75% sales charge and
assumes reinvestment of all dividends at net asset value.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED
- -------------------------------------------------------------------------------
OFFERING ACTIVITY
REIT offerings of securities recorded more than $10 billion
of equity issuance in the first half of 1997. Included in that
amount were four IPOs totaling approximately $1.5 billion,
however, secondaries continue to be the driving force in the
business. Boston Properties (NYSE: BXP) was the largest IPO
($902 million) of the first half of 1997, but of greater interest
is that BXP had access to private capital and yet chose to go
public. This is telling because publicly traded real estate
companies are becoming the preferred format for holding real
estate investments for developers and investors alike. Company
plans call for increasing the portfolio from $2 billion to $6
billion over the next 3-4 years and this growth can only be
accommodated in a public market setting where access to capital
is limited only by ability to create shareholder value.
REITS AND RUSSELL 2000 4
Due to the continued growth in market capitalization, REITs
are increasingly finding their way into both the Russell 2000 as
well as the Russell 10005 indexes. Interestingly REITs as a
percentage of the Russell 2000 moved from 8.5% to 7.1% because 11
of the largest REITs graduated from the 2000 to the 1000.
LEGISLATIVE NEWS
On June 13th the House Ways and means Committee passed the
REIT Simplification Act as part of the "balanced-budget" package.
One proposal put forth by REIT advocates was to reduce the
required distribution of taxable income from the current 95% to
90%. This would have allowed REITs to retain more earnings to
fund growth and provide investors a larger cushion between
earnings and distributions. As the components of legislative
change evolved, it became apparent that it would be difficult to
pass the reduced payout provision and it was scrapped. It is
important to draw a distinction on the topic of dividends as a
percentage of taxable income vs. distributions as a percentage of
cash flow. The main difference is that depreciation is deducted
for purposes of taxable income but is not a cash flow item and is
therefore not deducted from cash flow computations. REITs do have
the ability to retain some earnings but not as much as a typical
corporation.
- ---------------------
4 The Russell 2000 is an index comprised of the smallest 2,000 of
the largest 3,000 U.S.companies based upon market capitalization.
5 The Russell 1000 is an index comprised of the smallest 1,000 of
the largest 3,000 U.S. companies based upon market capitalization.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED
- -------------------------------------------------------------------------------
The second legislative topic of interest to investors is the
"30% Gross Income Test" and the proposed repeal of that
provision. The test effectively reduces a REIT's ability to
trade real estate assets held for less than four years because no
more than 30% of its income may be from such sales, securities
held less than one year and disposition of property in certain
prohibited transactions. As a practical matter REITs will be net
buyers for the foreseeable future and rarely sell properties held
short-term. So what would be the potential benefits to a REIT
and therefore the shareholders? A couple of simple examples come
to mind. First of all, if a REIT were to buy a distressed
property and successfully achieve a high return, the REIT may
want to sell the asset and redeploy that capital into another
high yield opportunity. Secondly, REITs will frequently buy
portfolios of real estate and the sellers want them to take "the
good and the bad". Current law limits the REITs ability to sell.
This new tax provision would add a flexibility to the operating
policies and allow REITs to sell when they felt that the invested
capital could be used better elsewhere.
OUTLOOK
Public REITs continue to grow as a percentage of the U.S.
real estate market, consistent with the trend of gradually
shifting ownership from private hands to public companies. Real
estate owned by public REITs now represents about 10% of the $1.6
trillion U.S. commercial market. We expect this trend to continue
as both investors and real estate companies find characteristics
of the public real estate market very attractive.
Importantly for REIT shareholders, we expect REITs to
continue to have strong growth in cash flow per share. Internal
growth from rising rents and occupancy, coupled with an
attractive acquisition market and low interest rates should
provide continued solid performance from real estate securities.
Sincerely,
/s/Dean A. Sotter /s/Timothy J. Pire, CFA /s/Randy Newsome
Dean A. Sotter Timothy J. Pire Randy Newsome
Portfolio Manager Portfolio Manager Portfolio Manager
August 11, 1997
- -----------
8/97. Rodney Square Distributors, Inc. is the distributor for the Heitman/PRA
Institutional Class. ACG Capital Corporation is the distributor for the Advisor
Class.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------------------------------------
NAREIT MARKET
CLASSIFI- VALUE
SHARES CATION (NOTE 2)
------ --------- --------
COMMON STOCK - 87.2%
Alexander Haagen Properties, Inc. 303,500 Equity $ 4,931,875
Arden Realty Group, Inc. 113,300 Equity 2,945,800
Associated Estates Realty Corp. 80,000 Equity 1,880,000
Avalon Properties, Inc. 168,172 Equity 4,813,923
Bay Apartment Communities, Inc. 87,000 Equity 3,219,000
Bedford Property Investors, Inc. 132,500 Equity 2,666,563
Boston Properties, Inc. 85,600 Equity 2,354,000
Boykin Lodging Co. 57,300 Equity 1,371,619
Brandywine Realty Trust 85,400 Equity 1,729,350
Cali Realty Corp. 303,100 Equity 10,305,400
Carramerica Realty Corp. 33,200 Equity 954,500
Catellus Development Corp.* 169,400 Equity 3,070,375
Centerpoint Properties Corp. 112,900 Equity 3,584,575
Chelsea GCA Realty, Inc. 89,993 Equity 3,419,734
Colonial Properties Trust 123,038 Equity 3,614,241
Crescent Real Estate Equities Co. 105,000 Equity 3,333,750
Crescent Operating, Inc. 10,500 Equity 126,000
Developers Diversified Realty Corp. 127,930 Equity 5,117,200
Equity Residential Properties Trust 82,237 Equity 3,906,258
Essex Property Trust, Inc. 363,100 Equity 11,664,587
Excel Realty Trust, Inc. 302,900 Equity 7,988,988
Felcor Suite Hotels, Inc. 21,900 Equity 815,775
First Union Real Estate 595,950 Equity 8,417,794
Great Lakes REIT, Inc. 84,000 Equity 1,380,750
Grubb & Ellis Realty Income Trust* 189,700 Mortgage 96,747
Kilroy Realty Corp. 124,300 Equity 3,138,575
Kimco Realty Corp. 185,000 Equity 5,873,750
Liberty Property Trust 97,600 Equity 2,427,800
Meridian Industrial Trust 199,600 Equity 4,690,600
Parkway Properties, Inc. 128,800 Equity 3,461,500
Public Storage, Inc. 214,900 Equity 6,285,825
Regency Realty Corp. 52,400 Equity 1,427,900
Rouse Co. 285,000 Equity 8,407,500
Security Capital Atlantic, Inc. 128,200 Equity 3,068,787
Security Capital Industrial Trust 52,891 Equity 1,137,157
Security Capital Pacific Trust 85,230 Equity 1,949,636
Servico, Inc. 212,700 Equity 3,163,912
Sovran Self Storage, Inc. 97,600 Equity 2,854,800
Spieker Properties, Inc. 208,100 Equity 7,322,519
Starwood Lodging Trust 164,900 Equity 7,039,169
Storage Trust Realty 158,100 Equity 4,189,650
The accompnaying notes are an integral part of the financial statements.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) - CONTINUED JUNE 30, 1997
- -----------------------------------------------------------------------------
PAR ($000) NAREIT MARKET
OR NUMBER CLASSIFI- VALUE
OF SHARES CATION (NOTE 2)
--------- --------- --------
Storage USA, Inc. 44,400 Equity $ 1,698,300
Summit Properties, Inc. 92,500 Equity 1,907,812
Trizec Hahn Corp. 699,400 Equity 14,949,675
Vornado Realty Trust 45,400 Equity 3,274,475
Wellsford Real Properties 7,375 Equity 81,125
------------
Total Common Stock (Cost $150,966,988) ................... 182,059,271
------------
PREFERRED STOCKS - 1.7%
Beacon Properities Corp., 8.98%, Ser. A,
Perpetual ...................... 69,500 - $ 1,750,531
Equity Residential Properties, 7.00%,
Ser. E, Convertible ............. 30,300 - 806,738
Security Capital Industrial Trust, 7.00%,
Convertible ..................... 33,600 - 936,600
------------
Total Preferred Stocks (Cost $3,281,400) ................. 3,493,869
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.4%
Federal Home Loan Bank Discount Notes, 5.30%,
due 07/01/97 (COST $23,930,000) $23,930 - 23,930,000
------------
TOTAL INVESTMENTS (COST $178,178,388) - 100.3%......... 209,483,140
------------
OTHER ASSETS AND LIABILITIES, NET - (0.3)%............. (710,098)
------------
NET ASSETS - 100.0%.................................... $ 208,773,042
=============
*Non-income producing security.
The accompanying notes are an integral part of the financial statements.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) - JUNE 30, 1997
- -------------------------------------------------------------------------------
ASSETS:
Investments, at market value (identified
cost $178,388)(Note 3)................. $ 209,483,140
Cash..................................... 3,145
Receivables
Capital shares sold .................... 273,918
Dividends .............................. 1,092,599
Investment securities sold............. 242,089
Other assets ............................ 788
--------------
TOTAL ASSETS.......................... 211,095,679
--------------
LIABILITIES:
Payables:
Capital shares redeemed ................ 344,514
Investment management fees (Note 4) .... 116,099
Investment securities purchased ........ 1,668,729
Accrued expenses ....................... 193,295
-------------
TOTAL LIABILITIES..................... 2,322,637
-------------
NET ASSETS:
(Applicable to 18,247,914 shares of $0.001
par value beneficial interest issued and
outstanding; unlimited number of shares
authorized) ............................. $ 208,773,042
==============
Net asset value, offering price
and redemption price per
Institutional class share
($135,417,922 / 11,840,740).............. $11.44
======
Net asset value, offering price and redemption
price per Advisor class share
($73,355,120 / 6,407,174)............... $11.45
======
Offering price per Advisor class share
($11.45 / 0.9525)........................ $12.02
======
COMPONENTS OF NET ASSETS:
Paid-in capital............................ $ 156,090,889
Distributions in excess of net investment
income.................................... (1,035,211)
Accumulated net realized gain on
investments............................... 22,412,612
Net unrealized appreciation of investments. 31,304,752
--------------
NET ASSETS.................................. $ 208,773,042
==============
The accompanying notes are an integral part of the financial statements
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1997(UNAUDITED)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (Note 2) ......................... $ 3,777,379
Interest.................................... 374,302
--------------
Total investment income.................... 4,151,681
--------------
EXPENSES:
Advisory fees (Note 4)...................... $ 702,989
Administration fees (Note 4)................ 100,523
Trustees' fees and expenses (Note 5)........ 35,145
Accounting fees (Note 4).................... 46,589
Professional fees........................... 69,172
Custodian fees.............................. 23,500
Insurance................................... 23,847
Federal Registration fees................... 2,467
State Registration fees..................... 10,911
Shareholder report fees..................... 11,118
Distribution fees - Advisor Shares (Note 4). 89,635
Shareholder Servicing fees - Advisor Shares
(Note 4)................................... 89,635
Transfer agent fees......................... 52,519
Other ...................................... 10,814
----------
Total expenses............................. 1,268,864
-------------
Net investment income.................. 2,882,817
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions. 22,594,223
Net change in unrealized depreciation of
investments ................................ (13,416,866)
-------------
Net realized and unrealized gain on
investments ............................... 9,177,357
-------------
Net increase in net assets resulting from
operations .................................. $ 12,060,174
==============
The accompanying notes are an integral part of the financial statements
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH FOR THE FISCAL
PERIOD ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
------------- ------------
OPERATIONS:
Net investment income (Note 2) ............. $ 2,882,817 $ 5,550,774
Net realized gain from security transactions 22,594,223 11,165,013
Net change in unrealized appreciation
(depreciation) of investments ............. (13,416,866) 34,985,157
------------- ------------
Net increase in net assets resulting
from operations .......................... 12,060,174 51,700,944
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS -
INSTITUTIONAL SHARES (NOTE 2):
From net investment income ($0.17 and
$0.37 per share, respectively)............. (1,968,621) (4,155,578)
In excess of net investment income
($0.05 and $0.10 per share, repectively).... (672,934) (1,094,050)
From net capital gains ($0.00 and $0.41
per share, respectively)................... - (4,677,017)
DISTRIBUTIONS TO SHAREHOLDERS - ADVISOR SHARES
(NOTE 2):
From net investment income ($0.14 and
$0.31 per share, respectively)............. (914,196) (1,395,196)
In excess of net investment income
($0.05 and $0.12) per share repectively)... (362,277) (529,580)
From net capital gains ($0.00 and $0.41 per
share, respectively)....................... - (2,751,674)
------------- -------------
Total distributions paid to shareholders... (3,918,028) (14,603,095)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Receipt from Institutional Shares sold ..... 18,815,421 45,944,221
Receipt from Institutional Shares issued
on reinvestment of distributions........... 929,638 3,754,881
Institutional Shares redeemed .............. (19,091,594) (41,272,537)
Receipt from Advisor Shares sold............ 47,551,887 67,072,455
Receipt from Advisor Shares issued on
reinvestment of distributions.............. 1,177,627 4,469,947
Advisor Shares redeemed..................... (57,831,749) (9,199,099)
------------ -------------
Increase (decrease) in net assets resulting
from capital share transactions a ........ (8,448,770) 70,769,868
------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ... (306,624) 107,867,717
NET ASSETS:
Beginning of period......................... 209,079,666 101,211,949
------------- -------------
End of period............................... $ 208,773,042 $ 209,079,666
============= =============
A TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST WERE:
Institutional Shares sold .................. 1,693,144 4,898,411
Institutional Shares issued on reinvestment
of distributions .......................... 81,865 376,263
Institutional Shares redeemed .............. (1,724,299) (4,542,560)
Advisor Shares sold ........................ 4,255,745 7,164,380
Advisor Shares issued on reinvestment of
distributions ............................. 103,583 429,486
Advisor Shares redeemed .................... (5,221,036) (961,503)
------------- ------------
Net increase (decrease) in shares ......... (810,998) 7,364,477
Shares outstanding - Beginning balance ..... 19,058,912 11,694,435
------------- ------------
Shares outstanding - Ending balance ........ 18,247,914 19,058,912
============= ============
The accompanyng notes are an integral part of the financial statements.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The table below sets forth financial data for a share of
beneficial interest outstanding throughout each fiscal
period presented.
INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE-MONTH
SIX-MONTH FOR THE FISCAL YEARS PERIOD ENDED FOR THE FISCAL YEARS
PERIOD ENDED ENDED DEC 31, DEC 31 ENDED SEPTEMBER 30,
JUNE 30, 1997 --------------------- ------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) 1996 1995 1994 1994 1993 1992
------------ ---- ---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF PERIOD... $10.96 $8.65 $8.30 $9.23 $10.95 $8.29 $7.66
------ ----- ----- ----- ------ ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)............. 0.17 0.37 0.33 0.10 0.32 0.40 0.45
Net realized and unrealized gain (loss)
on investments...................... 0.53 2.82 0.53 (0.05) (0.92) 2.67 0.63
------ ----- ----- ----- ------ ----- -----
Total from investment operations 0.70 3.19 0.86 0.05 (0.60) 3.07 1.08
------ ----- ----- ----- ------ ----- -----
DISTRIBUTIONS
From net investment income (a)........ (0.17) (0.37) (0.33) (0.10) (0.31) (0.41) (0.45)
In excess of net investment income.... (0.05) (0.10) 0.00 0.00 0.00 0.00 0.00
From net realized gain on investments. 0.00 (0.41) 0.00 (0.77) (0.67) 0.00 0.00
From tax return of capital (b)........ 0.00 0.00 (0.18) (0.11) (0.14) 0.00 0.00
------ ----- ----- ----- ------ ----- -----
Total distributions.............. (0.22) (0.88) (0.51) (0.98) (1.12) (0.41) (0.45)
------ ----- ----- ----- ------ ----- -----
NET ASSET VALUE, END OF PERIOD........ $11.44 $10.96 $8.65 $8.30 $9.23 $10.95 $8.29
====== ====== ===== ===== ===== ====== =====
Total Return.......................... 6.42%c 38.06% 10.87% 0.65%c (5.22)% 37.76% 14.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's).. $135,418 $129,275 $95,692 $105,569 $116,268 $141,672 $66,521
Ratio of expenses to average
net assets......................... 1.08%* 1.23% 1.29% 1.28%* 1.22% 1.24% 1.37%
Ratio of net investment income to
average net assets (a).............. 3.04%* 4.09% 3.97% 4.35%* 2.87% 4.37% 5.75%
Portfolio Turnover.................... 83.41%* 59.88% 65.33% 37.55%* 90.11% 61.47% 28.05%
Average commission rate paid(d)....... $0.0409 $0.0504 - - - - -
<FOOTNOTE>
- -----------------------
*Annualized.
a Distributions from REIT investments generally include a
return of capital. For financial reporting purposes,
through September 30, 1993, the Fund recorded all
distributions received, including the returns of capital,
as net investment income.
b Historically, the Fund has distributed to its shareholders
amounts approximating dividends received from the REITs.
As more fully explained in Note 2, the Fund, for the
fiscal year ended September 30, 1994, adopted an
accounting pronouncement affecting the presentation of
distributions to shareholders. The financial highlights
for the years ended September 30, 1992 through 1993 have
not been restated.
c Not annualized.
d Required disclosure for fiscal years beginning after
September 1, 1995 pursuant to SEC regulations.
</FOOTNOTE>
</TABLE>
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
FINANCIAL HIGHLIGHTS - CONTINUED
- -------------------------------------------------------------------------------
The table below sets forth financial data for a share of
beneficial interest outstanding throughout the fiscal
periods presented.
ADVISOR SHARES
<TABLE>
<CAPTION>
FOR THE SIX-MONTH FOR THE FISCAL
PERIOD ENDED YEAR ENDED FOR THE PERIOD
JUNE 30, 1997 DECEMBER 31, MAY 15, 1995+
(UNAUDITED) 1996 THROUGH DECEMBER 31, 1995
----------------- ------------- ---------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $10.98 $8.67 $8.00
------ ------ -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)............... 0.14 0.31 0.23
Net realized and unrealized gain
on investments........................ 0.52 2.84 0.80
------ ------ -----
Total from investment operations 0.66 3.15 1.03
------ ------ -----
DISTRIBUTIONS
From net investment income (a).......... (0.14) (0.31) (0.23)
In excess of net investment income...... (0.05) (0.12) 0.00
From net realized gain on
investments........................... 0.00 (0.41) 0.00
From tax return of capital (b).......... 0.00 (0.00) (0.13)
------ ------ -----
Total distributions................. (0.19) (0.84) (0.36)
------ ------ -----
NET ASSET VALUE, END OF PERIOD........... $11.45 $10.98 $8.67
====== ====== =====
Total Return (c)......................... 6.07% 37.44% 13.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's).... $73,355 $79,805 $5,520
Ratio of expenses to average net assets. 1.58%* 1.73% 1.99%*d
Ratio of net investment income to
average net assets (a)................ 2.55%* 3.91% 4.27%*d
Portfolio Turnover...................... 83.41%* 59.88% 65.33%*
Average commission rate paid (e)........ $0.0409 $0.0504 -
<FOOTNOTE>
- -----------------------
* Annualized.
+ Commencement of Operations.
a Distributions from REIT investments generally include a
return of capital, which the Fund records as a reduction
in the cost basis of its investments.
b Historically, the Fund has distributed to its shareholders
amounts approximating dividends received from the REITs.
Such distributions may include a portion which may be a
return of capital.
c This result does not include the sales charge. If the
charge had been included, the return would have been
lower. The total return figure for the fiscal periods
ended June 30, 1997 and December 31, 1995 have not been
annualized.
d During 1995, the Advisor agreed to reimburse a portion of
the Advisor Shares' expenses. Without reimbursement, the
expense ratio would have been 5.34% and the ratio of net
investment income to average net assets would have been
0.92%.
e Required disclosure for fiscal years beginning after
September 1, 1995 pursuant to SEC regulations.
</FOOTNOTE>
</TABLE>
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
Heitman Securities Trust (the "Trust") is registered as a
diversified open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Trust was organized on September 15, 1988, as a
Massachusetts business trust under a Master Trust Agreement
which was amended and restated on February 28, 1995 (the
"Master Trust Agreement"). The Master Trust Agreement permits
the issuance of an unlimited number of shares of beneficial
interest in separate series, with shares of each series
representing interests in a separate portfolio of assets.
Heitman Real Estate Fund (the "Fund") was organized as a
series of the Trust on September 15, 1988 and shares of the
Trust representing interests in the Fund were registered with
the Securities and Exchange Commission on January 4, 1989.
The Fund's investment objective is to obtain high total return
consistent with reasonable risk by investing primarily in
equity securities of public companies principally engaged in
the real estate business.
The Fund offers two classes of shares (Institutional Shares and
Advisor Shares). Institutional Shares and Advisor Shares are
substantially identical, except that Advisor Shares bear the
fees that are payable under a Distribution Plan adopted by the
Board of Trustees ( the "Distribution Plan") at an annual rate
of 0.25% of the average daily net assets of Advisor Shares.
The Advisor Shares bear the fees payable to service
organizations pursuant to a Shareholder Servicing Plan at an
annual rate of 0.25% of the average daily net assets of
Advisor Shares owned by shareholders with whom the service
organizations have a servicing relationship. In addition to
the fees paid pursuant to the Distribution Plan and the
Shareholder Servicing Plan, each class bears the expenses
associated with transfer agent fees and expenses, printing of
shareholder reports, registration fees, administrative, and
accounting fees. Institutional Shares were offered for sale on
March 13, 1989 and Advisor Shares were offered for sale on May
15, 1995.
Because the Fund may invest a substantial portion of its assets
in REITs, the Fund may also be subject to certain risks
associated with direct investments in REITs. REITs may be
affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants.
Furthermore, REITs are dependent upon specialized management
skills, have limited diversification and are, therefore,
subject to risks inherent in financing a limited number of
projects. REITs depend generally on their ability to generate
cash flow to make distributions to shareholders, and certain
REITs have self-liquidation provisions by which mortgages held
may be paid in full and distributions of capital returns may
be made at any time. In addition, the performance of a REIT
may be affected by its failure to qualify for tax-free pass-
through of income under the Internal Revenue Code or its
failure to maintain exemption from registration under the 1940
Act.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES TRANSACTIONS AND INVESTMENT INCOME
The Fund's investment securities portfolio consists primarily of
investments in public companies engaged in the real estate
business. Investment securities transactions are recorded on a
trade date basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Realized gains or
losses on sales of investment securities are determined on the
first-in, first-out ("FIFO") basis.
The majority of the dividend income recorded by the Fund is from
Real Estate Investment Trusts ("REITs"). For tax purposes, a
portion of these dividends consists of capital gains and
returns of capital. For financial reporting purposes through
September 30, 1993, these dividends were recorded as dividend
income, and the investment in the REIT reported at market
value. During the fiscal year ended September 30, 1994,
effective October 1, 1993, the Fund changed its accounting
policy to record the return of capital portion of dividends
received, as provided by the REITs, as a reduction in the cost
basis of its investments in the REITs. This change has no
effect on the calculation of net asset value per share.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED JUNE 30, 1997
- -------------------------------------------------------------------------------
Generally, the Fund has distributed to its shareholders amounts
approximating distributions received from the REITs.
Accordingly, the Fund's distributions to shareholders have
included the return of capital received from the REITs as well
as returns of capital attributed to distributions of other
income for financial reporting purposes which was not subject
to current taxation. In accordance with Statement of Position
93-2, Determination, Disclosure and Financial Statement
Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies ("SOP"), distributions
representing a return of capital for tax purposes are charged
to paid-in capital.
INVESTMENT SECURITIES VALUATION
Investment securities traded on a national securities exchange
are valued at the last reported sales price on the day of
valuation. If there has been no sale, the investment security
is valued at the average between the closing bid and closing
offer quoted on such day. Investment securities traded only in
the over-the-counter market are valued at the last price
reported on the NASDAQ National Market System, or, if the
security is not reported on the NASDAQ National Market System,
at the last reported bid on such day. Otherwise, the
investment security is valued by such method as the Trustees
shall determine in good faith to reflect its fair value.
Effective May 14, 1992, Grubb & Ellis Realty Trust ("GRIT")
completed its dissolution by transferring all its remaining
assets to a liquidating trust. On the date of the dissolution,
GRIT's shares were canceled and replaced by beneficial
interests in a liquidating trust, which are not transferable.
On March 25, 1994 and November 5, 1996, the Fund received
distributions from GRIT in the amount of $369,915 and
$110,026, respectively, representing $1.95 and $0.67,
respectively, for each share of the GRIT liquidating trust
held by the Fund. The Trustees have determined that the Fund's
ownership in the remainder of the liquidating trust should be
valued at $0.51 per share. At June 30, 1997, the Fund owned
189,700 shares of the GRIT liquidating trust for a value of
$96,747.
INCOME TAXES
The Fund intends to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended. As a regulated investment company,
the Fund will be entitled to claim a dividends paid deduction
for distributions of income and capital gains to shareholders.
Accordingly, the Fund will not be liable for federal income
taxes to the extent its taxable investment income and net
realized capital gains are fully distributed to shareholders.
The Fund is also subject to a nondeductible 4% excise tax
calculated as a percentage of certain undistributed amounts of
net investment income and net capital gains. The Fund intends
to distribute its net investment income and capital gains as
necessary to avoid this excise tax. The amount of capital
loss carryforward utilized during the fiscal year ended
December 31, 1996 was approximately $3,735,000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED JUNE 30, 1997
- ------------------------------------------------------------------------------
EXPENSES
All expenses of the Fund (other than expenses incurred under the
Distribution Plan and the Shareholder Servicing Plan) are
allocated to each class on the basis of the net asset value of
that class in relation to the net asset value of the Fund.
NOTE 3 - INVESTMENT SECURITIES
For the six-month period ended June 30, 1997, the cost of
purchases and the proceeds from sales of investment securities
(excluding short-term investments) aggregated $78,256,976 and
$93,166,159, respectively. Cost for federal income tax
purposes is $178,377,736 and unrealized appreciation consists
of:
Gross unrealized appreciation $31,705,694
Gross unrealized depreciation (600,290)
-----------
Net unrealized appreciation $31,105,404
===========
NOTE 4 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Fund entered into an Investment Management Agreement (the
"Agreement") with Heitman/PRA Securities Advisors, Inc. (the
"Advisor") on January 31, 1995. The Advisor is a wholly owned
subsidiary of Heitman Financial Ltd. ("Heitman"), a wholly
owned subsidiary of United Asset Management Corporation. The
Fund pays the Advisor a fee for its services, calculated daily
and paid monthly, at the annual rate of 0.75% of the Fund's
first $100 million of average daily net assets and 0.65% of
the average daily net assets of the Fund in excess of $100
million, excluding assets invested in any money market mutual
fund. The Agreement provides that in the event total expenses
of the Fund (exclusive of interest, taxes, brokerage expenses,
distribution expenses and extraordinary items) for any fiscal
year of the Fund exceed (i) 1.75% of the Fund's average net
assets up to $50 million plus (ii) 1.50% of the Fund's average
net assets in excess of $50 million, the Advisor will pay or
reimburse the Fund for that excess up to the amount of its
advisory fee during that fiscal year.
Prior to January 31, 1995, PRA Securities Advisors, L.P. (the
"Prior Advisor") served as the Fund's advisor pursuant to an
Investment Management Agreement whose terms were substantially
the same as the Fund's current Agreement with the Advisor.
Rodney Square Management Corporation ("Rodney Square"), a wholly
owned subsidiary of Wilmington Trust Company ("WTC"), which is
wholly owned by Wilmington Trust Corporation, a publicly held
bank holding company, provides accounting, administration and
transfer agent services. For accounting services provided,
the Fund pays an annual fee of $75,000, plus an amount equal
to 0.02% of the Fund's average daily net assets in excess of
$100 million, plus any out-of-pocket expenses. For
administrative services provided, Rodney Square receives a
monthly administration fee from the Fund at an annual rate of
0.10% of the Fund's average daily net assets, plus any out-of-
pocket expenses. Additionally, for administrative services
provided, the Advisor Shares are subject to a minimum annual
fee of $25,000.
<PAGE>
[GRAPHIC] HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED JUNE 30, 1997
- ------------------------------------------------------------------------------
The Fund has adopted a Distribution Plan for the Advisor Shares
in accordance with Rule 12b-1 under the 1940 Act. Under the
provisions of the Distribution Plan, the Fund makes payments
to ACG Capital Corporation, the distributor for the Advisor
Shares ( "ACG" or the "Distributor") at an annual rate of
0.25% of the daily net assets of Advisor Shares of the Fund as
a distribution fee. The distribution fees are used by the
Distributor to finance activities primarily intended to result
in the sale of Advisor Shares of the Fund.
The Fund has also adopted a Shareholder Servicing Plan for the
Advisor Shares. Pursuant to the Shareholder Servicing Plan,
the Trust contracts with service organizations to provide a
variety of shareholder services, such as maintaining
shareholder accounts and records, answering inquiries
regarding the Fund, and processing purchase and redemption
orders. The Fund pays fees to service organizations in
amounts up to an annual rate of 0.25% of the daily net asset
value of Advisor Shares owned by shareholders with whom the
service organization has a servicing relationship.
NOTE 5 - REMUNERATION OF TRUSTEES
Certain officers and trustees of the Fund are also officers
and/or affiliates of the Advisor or certain shareholders.
<PAGE>
[Outside cover -- divided into two sections]
[Left Section]
INVESTMENT ADVISOR
HEITMAN/PRA SECURITIES ADVISORS, INC.
180 NORTH LASALLE STREET, SUITE 3600
CHICAGO, IL 60601
OFFICERS
WILLIAM L. RAMSEYER, CHAIRMAN AND CEO
DEAN A. SOTTER, VICE PRESIDENT AND TREASURER
TIMOTHY J. PIRE, SECRETARY
RANDY NEWSOME, ASSISTANT SECRETARYY
LAURIE V. BROOKS, ASSISTANT SECRETARY
JOHN J. KELLEY, ASSISTANT TREASURER
BOARD OF TRUSTEES
ROBERT W. BEENEY
DONALD L. FOOTE
JOHN F. GOYDAS
WILLIAM L. RAMSEYER
GEROGE C. WEIR
MAURICE WIENER
DISTRIBUTOR - HEITMAN/PRA INSTITUTIONAL CLASS
RODNEY SQUARE DISTRIBUTORS, INC.
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
DISTRIBUTOR - ADVISOR CLASS
ACG CAPTIAL CORPORATION
1661 TICE VALLEY BOULEVARD #200
WALNUT CREEK, CA 94595
(800) 888-REIT
CUSTODIAN
WILMINGTON TRUST COMPANY
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
TRANSFER AGENT AND ADMINISTRATOR
RODNEY SQUARE MANAGEMENT CORPORATION
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
TRUST HEADQUARTERS
180 NORTH LASALLE STREET, SUITE 3600
CHICAGO, IL 60601
(800) 435-1405
HF08 8/97
[Right Section]
HEITMAN REAL ESTATE FUND
SEMI-ANNUAL REPORT
JUNE 30, 1997
[GRAPHIC] Heitman Logo
